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Book Review

Why human psychology matters for global capitalism

The book could not have been more timely as it
The book could not have been more timely as it questioned economic orthodoxy, interrogated models and theorems which have since the dawn of Keynesianism been deemed beyond reproach. PHOTO | COURTESY 

At a time when behavioural economics has gained popularity, it is difficult to appreciate just how unconventional Animal Spirits was at its first publication in 2009.

At the time, the global finance and economics punditocracy was grappling with how to arrest a crisis that had fast galloping into proportions that have now been likened to the Great Depression of the 1930s.

The book could not have been more timely as it questioned economic orthodoxy, interrogated models and theorems which have since the dawn of Keynesianism been deemed beyond reproach and, in an age where mainstream economics is dominated by quantifiable variables, awakened us to the need for according soft variables due consideration.

The phrase Animal Spirits refers to the thoughts and ideas that animate human behaviour and in turn influence the decisions of economic agents — individuals, households and firms.

Nobel laureate Akerlof and Shiller point out five animal spirits, including confidence and how a lack of it amplifies macroeconomic disturbances, but one really forms the core of the book — the money illusion.

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The book holds that the public is confused by inflation, the steady rise in the price of products, and deflation, the steady decline in the price of products, and does not reason sufficiently through their impact on budgets.

Why, for example, would workers resist reduction in nominal wages in episodes of deflation?

To what degree do households holding investment in securities such as stocks or bonds price in the erosion of inflation in determining their yield? If value for money is the end game for every rational economic agent, then the money illusion is the optic through which decisions ought to be perceived.

The book also delves into the pertinent question of the power of central banks and why, despite their position as lenders of last resort, the same could fall short of the needed magnitude in scenarios of crisis response.

In an environment where the standard economics textbook assumes a rational consumer, Animal Spirits offers a refreshing break away from mainstream thinking and offers worthwhile insights into why traditional models of analysis can no longer be deemed to be crystal balls of what lies ahead.

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